Risk & Compliance

Schapiro Protests Bill to Amend SEC’s Rulemaking

The SEC's chairman goes on the defense during a hearing about &doublequot;fixing&doublequot; her agency.
Sarah JohnsonSeptember 16, 2011

Mary Schapiro, chairman of the Securities and Exchange Commission, is pushing back against a bill that would require the securities regulator to put more work into its rulemaking process.

“My fear about this legislation is that it layers so much analysis on top of what we already do that we’re set up to fail,” Schapiro said at a House Financial Services Committee hearing on Thursday. “There is no way this agency or any other agency could do all of these things, some of which conflict.”

For example, the legislation would require the SEC (the only agency targeted in the bill) to give consideration to “protecting market participants” when it devises a rule. The regulator doesn’t consider this factor since, Schapiro noted, its focus is supposed to be on investor protection. The bill would also require the SEC to take into account, among other things, the effect a pending rule would have on capital formation, and determine whether the regulation “is tailored to impose the least burden on society.”

The discussion came during a hearing called “Fixing the Watchdog: Legislative Proposals to Improve and Enhance the SEC.” The committee also talked about a bill that would reorganize the commission, which has been under intensified congressional scrutiny since Schapiro took over in 2010, soon after the Bernard Madoff Ponzi scheme came to light.

Most recently, the SEC’s rulemaking process has been questioned. Earlier this summer, the U.S. Court of Appeals for the District of Columbia Circuit vacated the commission’s proxy-access rule because, according to the final opinion, the SEC “acted arbitrarily and capriciously for having failed . . . [to] adequately address the economic effects of a new rule.” The SEC has since decided not to appeal the court’s decision on the rule, which would have given some investors the ability to nominate corporate directors.

At Thursday’s hearing, Schapiro acknowledged her agency could improve its cost-benefit analysis following the D.C. court’s ruling. Longtime critics of the SEC would agree. The commission’s initial estimates for Sarbanes-Oxley compliance nearly a decade ago was an average of $91,000 per company, a calculation that was later ridiculed when companies began seeing their auditor bills rise to the millions.

The bill to improve the SEC’s process was introduced in June by Rep. Scott Garrett (R-N.J.). It already has 15 co-sponsors, although Garrett’s fellow Republicans acknowledged that it needs some tweaks. As written, the bill would lead the SEC to do a cost-benefit analysis on both its rules and orders, which Schapiro says would slow down enforcement actions.